Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

The Fed Throws Down the Gauntlet (August Update by Goatmug)

By -


We begin this month's review looking at rail traffic.  Rail traffic in general continues to improve over 2009 levels.  Because there are some seasonal issues going on around this time, I don't want to over-hype the small draw down that we are seeing here.  Seasonally adjusted we are only down around 1.3% in total tonnage from last month.  Having said that, every report I read is simply talking up how great the shipping tonnage rates are.  In an attempt to examine this, we can simply note that tonnage compared to 2009 is about 20% greater yet it is still around 10% lower than 2008.  In addition, we need to keep in mind that the best years on record for intermodal rail shipping were 2006 and 2007 so it is a bit more sobering to think that we are recovering, but not near peak levels.

GDP adjustments really reinforce this as last weeks revisions to GDP showed that growth in GDP was slowing well before 2008.


Motor Vehicle rail cargo and waste and scrap metal materials shipping is tailing down in recent months.  The autos shipping and sales data is absolutely seasonal so I don't want to highlight that much given that it may mean nothing, however the drop in scrap metal and waste movement is something to keep an eye on as these are inputs into the manufacturing process.  Later we'll look at scrap metal pricing.

Autos Scrap


As I mentioned last month KSU and KSU Mexico continue their slide in tonnage.  I put this up because we need to continue watching these rails and their cargo shipping.  Specifically for them, they are encountering a crossover from levels from last year in this quarter and this may be a concerning development to monitor.  Last month I mentioned CNI and showed their chart as the best performer.  I also suggested passing on their stock simply to wait for a retest below support.  That didn't work out well as the stock is now trading almost $6.00 or 11% higher. 




I wanted to include some data related to jobs.  Below is the information for the Employment Index.  This data shows a summary of online recruiting efforts and job availability.  This data highlights information from June, but I will begin updating it monthly in my chart form.  In that time period, Monster suggests that in 13 of the 20 major employment areas in the country, there were additional listings on job boards and company websites.  The biggest gains were made in hospitality and food services industries.  Examining the most recent unemployment report confirms these trends are continuing as well.

MonsterIndex Chart 1

ECRI continues to release data showing that the weekly leading indicators are falling.  Last week's -10.7% growth rate provides ammo to those that are arguing that we are headed for slow down, if not another recession.  Again, the slowing data here is in contradiction to the ever-ramping stock market. 




Housing drops and consumers reducing their purchases is driving the drop in growth rates.




The most recent Moody's / MIT Commercial Price Index Data shows that commercial real estate prices in the index increased 3.6% for the month of May.  Again, this data is lagging here, and isn't showing that pricing has leveled off yet. 




Equity market gains and other financial market rebounds have fueled the recovery in the Bloomberg Financial Conditions Index.  A level above 0 would indicate that the recession is over, numbers below show a contraction.  We have not pushed through zero yet, but a significant equity market explosion higher in August could at least give us a second attempt at moving into an expansionary number.



SCRAP METAL  - GOOD TIME AL'S FAVORITE INDICATOR– Alan Greenspan often said that he watched the price of scrap metal to determine the health of the economy.  Below is a scrap metal chart for the last two years.  Just like every 2 year chart it shows the same shape moving up and to the right, but it is interesting to point out that this index bottomed out in January of 2009.  This would have been a good indicator to use to portend the market's recovery in 2009.  We see that we've endured a drop in scrap pricing in late June and July, only to see a move up in the last week or so.




The USD's dramatic decline seems to have washed away all fear of European collapse or should I say the lack of fear of the European collapse has begun to wash away the value of the dollar!  Those stress tests sure did the trick didn't they?  The decline of the dollar has certainly also ushered in a revival of the stock markets.  Funny, we are now hearing that folks are concerned about the downward direction of the dollar.  The truth is simply this in my opinion.  We will have little upward momentum in the markets without a destruction of the value of the dollar.  Having said that, Alan Greenspan this weekend put into words what the FED is really thinking.  Greenspan simply stated that the market is the economy!  So, we must be on alert that since the "Economy is the Market" we are being reminded that asset values are the only concern of the Fed and the only hope to return things back to the good old days.  Understanding this means we remind ourselves that they seek a return to inflation, easy money and credit, and if it takes it, a decline in the purchasing power of the dollar.  Here me loud and clear.  There may be ups and downs in the value of the dollar, but if the FED has anything to do with it, there will be an ultimate walking down of the value of the currency.  This is the only way to survive and extend with the looming debt issues we have.   




The BDI has made a significant drop since May and June and is attempting a bottom here.  As commodity demand increases we should see a move higher in the cost of spot shipping, however the drop in the BDI is a reflection of the over supply of ships that stand ready to carry freight.  Still, if you are an owner of those ships that don't have long term contracts at a fixed price, you are probably hurting very badly at these rates.





I like the simple chart provided by the guys at Growthstock Advantage. Based on their indicator that examines the number of stocks trading above their 40 day moving average, the market is NOT overbought yet.  As stocks get extended it is sometimes helpful to fade the happiness when everyone loves the market.  Typically you might consider scaling out of positions or shorting at that time.  At this point the indicator is NEUTRAL. 





I showed this chart last month and it is simply a 14 month moving average of the Dow.  When the average turns and heads south like it did last month at the end of July, it is an indicator that the market may be headed the other direction.  The COPPOCK is one of those indicators that confirms a move rather than one that is predictive.  Having said that, even with July's monstrous performance, the COPPOCK is suggesting that we are still going to go lower and therefore it is BEARISH.


CoppockGraph Chart 1


US Libor continues to improve and so do all other denominated Libor measures.  I made a comment right after the European financial stress test result release that I'd be watching these levels to get a confirmation that the banks actually were believing what was being served up.  Because we are seeing a drop in these rates we can confirm that stress is abating. So while the contraction in rates is only a few basis points since last week, it is a 10% reduction in 1 week funding rates, which is significant.  


St. Louis Fed President Bullard Throws Down the Gauntlet
As the flood of disappointing news rolls in about a slowing economy, St. Louis Fed President James Bullard moved from his centrist position to one of outright advocacy for the spawning of the Son of Stimulus just like we've been warning for at least a month.  Bullard's discussion warned of the specter of a Japanese style deflation, exactly what they want to avoid at all costs.  Bullard's comments make it all the more likely that the Fed will actually move to invoke more stimulus in the form of buying treasuries, buying more agency backed mortgages, and maintaining a near zero rate (no hikes).

Bullard's comments probably are part of an orchestrated effort to convey the Fed's future policy.  We cannot forget that no matter how ineffective Fed policies have been thus far in creating a real recovery in the economy, this is really about creating a rebound in market or as Big Al would say, "It's all about the asset values".  Check back to the post we made last year regarding Bernanke's 2002 deflation speech.  There is no ambiguity there.  He is positively stating that the Fed can and must win against the deflation enemy.  Despite the fact that jobs have not returned and the housing market is still floundering, we will see a new round of QE that looks to further juice the market.  I would guess that this will have a smaller effect in terms of the magnitude of a move on the market and the impact will have less of a lasting effect in terms of time than last time, but if we get a formal confirmation from the Fed that they will provide liquidity, we will see a move up.

This further highlights the notion that we will probably see mortgage interest rates at 3% or 3.5% in 2011.  Isn't it funny how despite their efforts we continue to spiral the way of Japan.  Want to get an idea for what it might look like right now?  You can buy a Japanese 10 Year note and receive 1% on your money!  Hello deflation! PUBLIC ENEMY # 1 – DEFLATION

I'll remind you the futility of the game that the Fed is playing – FDR’s Secretary of the Treasury, Henry Morgenthau came to in 1939 after initially being a proponent in massive fiscal stimulus to cure the depression and employment. His comments are provided below:

"We have tried spending money…We are spending more than we have ever spent before and it does not work. I say after eight years of this administration, we have just as much unemployment as when we started… And an enormous debt to boot!”


Ok, so the Fed is beating the drum that they will do anything to stop deflation and they will continue to buy treasuries, what is the play for the month?  It is exactly the same strategy that I outlined on July 3rd in the Mid Year Review. We should continue to invest in emerging market issues focused in countries like Brazil, China, India, Indonesia, Malaysia, Chile, and Taiwan. 

All of these etfs have broken out, and even the S&P 500 extended its gains over the 1120 level I highlighted last week in "What I'm Watching Now".  While macro indicators confirm that a slow down from recents peaks in in the works, we cannot deny that there are areas which are showing improvement.  In addition and probably more importantly in the short run impact of a committed Fed.  Bullard essentially has thrown down the gauntlet and stated that the Fed will use all of its ammo to fight deflation.  Once again, the Fed playbook is opened and I suggest you read our post on deflation to remind yourself of the commitment to defeat that enemy at any cost.  The hawkish tones of Bullard emphasize what is at stake and the intensity of the desire to prevail. 

While I've been bearish on gold lately expecting a pullback to the $1040 area, I am tempering this because of the expected Fed devaluation.  CPI data will probably come in lower, yet this will only fuel the Fed's aggressive response.

Mole To The Rescue

By -

Alright, I have seen enough. It's time for someone to step and set the things straight over here at the Slope. Although I can't blame Tim-ay for relenting to bearish exhaustion it's important that we fade emotions and look at all evidence at hand before we get married to the long side. Quite frankly, I almost feel pity for the bulltards – for they have no idea what they're dealing with.


I said 'almost'…


This chart is something my stainless steel rats are more familiar with. I'll try to explain it this way: What you are seeing is the difference between the 'average' (think moving average) and the 'median'. 

What I have labeled on this chart are instances of when the SPX was in the 1120 – 1130 trading range. Which was a lot more often than I care to recall – we seem to be trapped in this range and I am starting to feel like Bill Murray. Anyway, the yellow marks are periods we spent in this range and the green marks connect to the moving average of the percentage of stocks above the 200-day SMA during that time. So, back in December (yes, half a year ago – the horror!!) we were at roughly 75%. Three months later at number 2 we were at around 65%. In May at number 3 we are at roughly 60%. And now/today we are at – gulp! – 46%.

What does that mean? Do we care? Yes we do. What it means is that there is a distinct and rapid steepening of the lead curve. And by that I mean that there is a greater polarity between the number of stocks in the SPX which are pushing up sharply and the ones which are flat or dropping. That’s the difference between the average and the median.

Jeezzz Mole – what does that mean again?

The average (or mean) is the sum of the values of all the observations, divided by the number of observations. It is the average value. The median is the value at which 50% of the observations lie above, and 50% lie below. Alright, now your head is spinning – let me fix that. Here is an example:

Here is a series of numbers: 1, 2, 3, 4, 5000, 9000, 8700. The median is the one in the middle: 4. To get to the average add them all up and divide by 7 – which is 3244.

Aaaah – I’m sure a light bulb just went on in your head 😉

You can assume that the median for stocks is usually lower than the average close to market tops. In other words again (and now we finally get somewhere), the price on the SPX represents the average, as it is a free-float capitalization-weighted index (please don’t ask me what that means), and the median (sort of – it’s based on the 200-day SMA) is the SPXA200R (which I put an SMA on, just to confuse you further).

Moral of the story: On the median side we can see that an increasing amount of stocks are dropping below the 200-day SMA, despite price claiming that the ‘value’ of the SPX is the same.

And that, boys and girls, is the definition of 'distribution'.


Here is a similar view, this time with a slightly higher 84-day SMA – we want to fade the noise. What I'm seeing is the exact same pattern we saw during the fall 2007 topping process. This actually confirms Karl Denninger's theory that we are going through a similar price fractal right now – maybe someone here can post the link, I can't find it.


Thus my outlook for the rest of the year is pretty clear. We are currently in a zigzag flat correction which may take us close to this year's high of 1219.80 on the SPX – and maybe we will even exceed it but that is by no means guaranteed. I also do not think that the Dow will exceed its high mark of 11,258.01. We may count a new high as an irregular top or we may slap another wave label on it to satisfy our never ending desire to make sense of this woodchipper of a market. Whatever floats your boat – but don't lose sight of the overall picture.

For the market internals are very clear – I have tons of charts in my repertoire (and which I present on a regular basis at my evil den of financial doom) which strongly suggest that this is nothing but a second wave correction in equities. After all – they are known to be brutal and leave most bears on the wayside. 

Remember – the bus always moves fastest when it's empty. 

Medium Term


Here are my short term musings on my SPX wave chart. That little overlap last week caused me to pull a very rare 'ending diagonal' card, but since it only happened on the SPX I may just choose to ignore it. The third option is to project new highs for the year – as this would mean that we are in a sub-dividing 3rd wave. And as Tim-ay pointed out – it may drive us a lot higher than any self respecting bear would care to imagine. 


My gold/silver ratio chart is already bouncing exactly where I suggested it would. Bear in mind that this supporting indicator can dance along that lower line for a while until equities finally relent and drop to the downside.


Copper is still pointing to the upside and it's been spot on all year. Which means that we're not turning just yet – give it until mid August, which in my estimate will be the curtain call for Soylent Green (i.e. the green scenario on my SPX wave count chart).

Whatever you do – stay frosty and don't yield to emotion! 



The Bulls Gain Power

By -

I confess to a growing fear that the bulls are going to take this market and run with it for the rest of the year. The action for the past month has been very positive for the bulls, and the next hurdle – across above 1130 – looks to be just about effortless at this point.


I’ve tinted that easy goal in green. The magenta tint, if crossed, would be even more profoundly damaging to the bear case. Finally, a cross of the cyan tint would firmly entrench bears in their role as a laughingstock. It’s not a pretty picture.

At the same time, the volatility index is back to levels that were very typical before the 2007-2008 crisis even took place. It’s as if nothing ever happened.


It seems to me that all eyes are on the jobs report, so Thursday might turn into a relatively quiet session ahead of that Friday morning report. Of course, the chatter now is that the jobs report is basically moot, since a bad report will goose the government in yet-another-bullish-stimulus, whereas a good report will excite people about the “green shoots’ yet again.

So, in spite of a bevy of really attractive bearish charts, the fact is that if the market in general (that is, the Dow and the S&P) keep pushing higher, that overall strength will snuff out the bearishness of even the most tantalizing patterns. The Dow 30 is not far away from rendering its entire head and shoulders pattern irrelevant.


So I’m in pretty low spirits right now. I think I’m going to call it a day at this point. If you guest writers out there want to pick up the pace, I’d appreciate it, because Springheel Jack is about the only one writing these days (which I appreciate, of course). Good evening, all.